Tax credits for R&D help those looking for it

The R&D tax credit is a federal credit aimed at encouraging business investments in technological innovation. In 2015, with the Protecting Americans from Tax Hikes Act, the R&D tax credit was made permanent, giving qualifying companies a chance to plan to take advantage of it.

“The credit offers companies the benefit of a percentage of expenditures for qualified R&D activities, which hinges on how much businesses invest in R&D,” says Monika Diehl, tax director at Clarus Partners. “Unfortunately, not all that qualify take it.”

Smart Business spoke with Diehl about the R&D tax credit and the qualifying activities it’s designed to encourage.

Are many companies that qualify for the R&D tax credit taking advantage of it?

Many companies are not taking advantage of the R&D tax credit. The low use is often attributed to lack of awareness that credit is out there and not understanding what activities qualify. There also had been a barrier to use because calculating the credit for many years was cumbersome. That has improved in recent years.

Previously, the process to calculate the credit required a comparison of current year qualifying activity against activity dating back to the creation of the credit. The option to use a simplified method was introduced several years ago. The simplified method compares the current year investment in qualifying activities to the same investment for the average of the previous three-year period, making it a lot simpler to get the information necessary to take the credit.

An R&D study is needed to document that a company’s specific activities qualify, so there is some time involved there.

What are some common misconceptions around the R&D tax credit that stop companies that qualify from pursuing it?

One of the main misconceptions about the R&D tax credit is that businesses mistakenly think it’s only applicable to activities performed in scientific environments, such as in a lab. That’s not the case. The credit applies to businesses in all types of industries and to a variety of activities that are technological in nature. There does need to be some component of uncertainly and a trial and error process to solve for some unknown, but this can be done in a typical business environment.

Some examples of qualifying activities are developing new products or product formulas or developing processes. These activities are conducted in many businesses, not just those considered to be highly scientific.

For companies that want to take advantage of the R&D tax credit, what should they know?

Recent changes in the law are making it easier for business activities to qualify for the credit and for smaller businesses to realize benefits.

The cost of research required to develop software primarily for the company’s internal use has historically, and under recently revised rules, been subject to meeting very specific guidelines in order to qualify. However, new guidance narrows the definition of Internal-Use Software allowing more projects to be considered under a more relaxed standard.

Recent changes are also helping smaller businesses benefit from the R&D credit. Eligible small businesses can now apply the credit against regular tax and the alternative minimum tax. Previously the benefit was available against the regular tax liability only. There is also an opportunity for qualified small businesses to apply the credit against payroll tax on employee wages. These changes provide smaller businesses with a cash benefit more quickly.

As with a lot of credits, businesses often don’t know they exist or what activities qualify. There are a number of helpful credits not only at the federal level, but also from the state down that encourage businesses to undertake certain activities and make certain investments. When investments are made that grow and improve a business and create jobs, governments frequently offer incentives to assist with costs through grants, tax credits, special financing arrangements, or reimbursement of costs to train new employees. Keep an eye out, because there is likely help available for those willing to look for it.

Insights Accounting is brought to you by Clarus Partners

Keeping a close eye on operations will help avoid surprises

One of the primary functions of management is to understand what is actually going on in an organization, as opposed to what is supposed to be happening.

However, for monitoring to be truly effective, there must first be good communication, a culture that promotes ethical behavior and a solid understanding of the particular organization’s risk factors.

Organizational monitoring is not just about protecting a company from fraud. Monitoring systems can help ensure quality, that customer needs are being met and that the company is doing everything else that is necessary to achieve its goals.

Smart Business spoke with James P. Martin, Managing Director at Cendrowski Corporate Advisors, LLC to discuss how management can better understand what is truly going on within the business.

What are the steps to an effective organizational monitoring plan?

First, the company must clearly define its goals. What is it trying to accomplish and how will it accomplish those goals? Second, what risks does it face? What can get in the way of the company accomplishing those goals? Third, what type of early-warning system does the company need? How will it know if and when a risk has occurred or if someone has not performed as expected?

What impacts are electronic monitoring systems having?

Electronic monitoring systems have been around awhile, but are drawing increased attention now with more severe penalties and potential outcomes for violations under Sarbanes-Oxley. Electronic monitoring systems are similar to a car’s dashboard. When trigger points, predefined events or hurdles are detected, ‘warning lights’ appear on the manager’s desktop.

While electronic monitoring is useful, it cannot — and should not — replace human involvement. The most important thing managers can do is be involved with operations on a day-to-day basis by walking around and talking with employees, holding regular meetings, receiving regular reports and phone calls, etc.

How are trigger points identified?
An organizational assessment of risk will help management identify areas that have more robust monitoring needs. Examples might include finance, everything related to potential issues arising with cash, or vendor management, such as notification every time a vendor’s address changes.

Triggers also can monitor quality metrics, supply chain issues, personnel issues, etc. The system should be proactive so that management can address issues before they get out of control, preventing a crisis management situation.

It’s important to note that a monitoring system is more holistic than the definition of trigger points. The single biggest factor is people — what they will do in a given situation. The overall culture needs good communication systems and a clear understanding of management expectations.

Monitoring techniques need to continuously adapt to consider potential changes in behavior. There are a lot of examples of companies that had defined monitoring procedures, but creative people were able to identify and exploit areas that were not considered in those procedures.

How do private equity firms monitor the activities of the companies they invest in?
Private equity firms have to monitor the operations of the portfolio companies, not to the extent of detail that internal management does, but they do need to define risk. These companies have expectations, and if they identify certain events on the horizon, they can be prepared to take certain actions. Like the companies they monitor, private equity firms also must define their own particular trigger points.

Any tips for improving a system?
Make sure you’re monitoring the right areas. There may be areas you’ve historically monitored that have now changed, which is where the internal audit function comes in. The board’s audit committee must understand what is critical for the upcoming year.

In examining the ‘audit universe’ — the model that defines every auditable event within the organization — areas of risk are identified, and then prioritized for audit. It’s management’s responsibility to determine how many resources to invest in each given area of risk.

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How to choose an auditor for the short- and long-term

The goal of an audit is to provide reliable financial information that can be used to shape the direction and major decisions of a company. A good auditor can ensure that, but he or she must be able to effectively communicate for the client-auditor relationship to work.

“During an audit, it’s essential that the auditor and the client communicate freely, exchanging ideas on how to address issues that arise,” says J.W. Wilson, CPA, director of accounting and auditing services at Clarus Partners. “The auditor should explain problems and solutions in a way that’s very easy to understand by those who aren’t auditors. It’s also important that the company feels connected to its audit partner, and feels as if it could build a solid working relationship for the future.”

Smart Business spoke with Wilson about what to consider when choosing an auditor, the process of selecting an auditor and how to gauge the auditor’s performance.

What are the criteria companies should use when choosing an auditor?

The criteria are different depending on the company’s size, the industry in which it operates and where the business is heading — if it’s going public, looking to sell, etc.

Industry expertise is important. Auditors who work with similar-sized companies in specific industries can provide better advice because they understand what’s going on from a legal and regulatory perspective.

Look for an auditor with a good reputation, which can be determined by asking your colleagues, bankers and other advisers.

Audits take a significant amount of time from the employees involved. Good auditors are respectful of the employees’ time. They only ask for what they need and don’t waste time.

The fee is an important consideration. It should at least seem reasonable given the scope of work. Ask how they bill for work outside the scope of the project, and whether they’ll provide a multiyear bid, which can be important for budgeting and forecasting purposes. It’s good to know what an audit will cost for the next three years. It’s difficult to switch auditors since each has their own process.

How can companies research potential auditors? What resources should they use?

Talk to your business partners such as accountants, bankers and attorneys as well as CFOs of other companies that you have a relationship with. Find out who they use or have talked to in the past.

You can always search for firms on the web. For private companies, the American Institute of Certified Public Accountants website has peer-reviewed reports for firms — every three years accounting firms are required to have a peer review to determine if their quality control measures conform to applicable accounting standards.

Public companies should be looking for accounting firms working through the Public Company Accounting Oversight Board, which oversees the audits of public companies.

After selecting an auditor and having an audit performed, how can companies determine whether or not they received a quality audit?

Companies should set up criteria to determine if the proper services were provided using criteria similar to what was used to select an auditor. It’s a good idea to get feedback from the people who deal with the auditor on a daily basis. Ask those involved: How was the communication? Was the work done in a timely manner? Did the auditor do all the work that was expected?

That feedback will determine whether you want to continue the relationship. If, for example, a company made a three-year commitment to an auditor and decides it wants to end that relationship, there’s a yearly engagement letter that, though binding, includes an out for each party. If an unsatisfied company wants out of the agreement, the audit firm would either offer a remedy or let the client company go in a different direction.

Assuming the firms available have equal auditing ability, pick the firm that, through proposal process, you feel you can build the best relationship with over the long haul.

Insights Accounting is brought to you by Clarus Partners

Why companies that don’t have an audit system, should

Internal and external audit systems provide companies with a method for testing internal controls, a process that can help detect or prevent fraud while making sure the company stays compliant, stops misappropriation of assets and corrects bad reporting. So it’s surprising that so many companies don’t have one in place.

“For many companies, a lack of an audit system reflects a perceived lack of time,” says J.W. Wilson, CPA, director of audit and accounting services at Clarus Partners. “That smaller companies don’t have the time or resources to implement an audit system, however, is a misconception.”

Smart Business spoke with Wilson about audit systems, their purpose, types and basic implementation.

Why might some companies not have an established audit system?

Often the term ‘audit’ conjures up the idea of large companies with full-time staffers whose only job is to conduct audits. Companies don’t need employees devoting significant time to an internal audit system for an audit to be effective. The process can be scaled down to focused processes any company can effectively manage. In fact, many business owners are likely already performing many audit functions, just without calling it an internal audit process.

There’s also the perception that audits performed by outside agencies are expensive and the value might not match the price. Companies most likely don’t need a top-to-bottom audit. They can have testing done that is designed to look for a specific process, which is very affordable.

What are the steps to putting an audit system in place?

Companies should start by talking with the experts that are closest to them. For instance, someone in the company may have an internal audit background and may be capable of establishing internal audit procedures. If not, talk with an external accounting firm. Auditors from an outside agency can be brought in to gauge the effectiveness of a company’s controls, or can offer advice on how to set up an internal audit process.

Testing can be fairly basic — for example, select and follow a transaction through the accounting cycle to a general ledger, compare the findings to those of the previous month and budgeted numbers, and if the numbers don’t match, a formal investigation should be undertaken.

When determining personnel processes, the top priority is segregation of duties, especially around handling cash and assets. Payroll is a good example. Within this function, the person who processes payroll shouldn’t be the same person who adds employees to the payroll system. Similarly, the person who initiates disbursements and transfers shouldn’t be the same person doing bank reconciliations.

At the end of each month, it should be standard practice to review financial statements and compare them to the previous month and the budget or forecasting statement to see if they meet expectations. Monthly statements should reflect what’s been budgeted. If not, what was the reason? Look into any unexpected results that don’t have a justification.

Ultimately a company needs to have the right controls in place and then test those controls. Run a random internal audit to test that the segregation of duties is being maintained. That can be done though a company’s accounting system. Each system has controls and rights associated with logins, so it’s possible to check to see that the segregation of duties is being maintained.

How can a company determine the best approach to setting up an audit system?

It’s important to understand that every company is different, so one company’s control procedures aren’t necessarily going to fit another company’s processes. Just focus on a few key procedures — those that may expose the company to the most risk of fraud — and make sure those processes are monitored and tested regularly.

The term audit shouldn’t be frightening. Efficient internal controls are important, no matter the type or size of the company. Internal and external controls can be scaled to fit a company’s specific needs. And if setting up an audit process is far outside the wheelhouse of anyone in the company, consider working with an accounting firm to test specific controls that are important to the business.

Insights Accounting is brought to you by Clarus Partners

The ins and outs of what to expect from equipment appraisals

At a certain point in time, almost every business owner will be faced with the question: What is your machinery/equipment really worth? Book value is rarely an accurate representation of what the equipment is really worth. More importantly, inquirers want to know the real value, which is accurate and can be substantiated.

Knowing what to expect during an equipment appraisal process can help business owners be more prepared.

Smart Business spoke with Theresa Shimansky, a manager at Cendrowski Corporate Advisors LLC, about the impact of machinery and equipment appraisals.

When is it time to have a certified appraiser evaluate a business’s equipment?
There are numerous reasons why businesses may need a machinery/equipment appraisal. Some of the most common reasons for appraisals are mergers and acquisitions, business valuations, bankruptcy, financing and SBA lending, insurance, buy/sell agreements, property taxes and partnership dissolutions.

A certified, reputable appraiser has the training, expertise and knowledge to provide a value that can be substantiated and reflects the true value of the equipment.

Are there different types of certified appraisal reports?
Yes, according to the Uniform Standards of Professional Appraisal Practice (USPAP) for personal property appraisals, Section 8, there are two types of written appraisals: Appraisal Reports and Restricted Appraisal Reports. A Restricted Appraisal is one in which the client and intended user of the report are the same.

However, if the intended user(s) includes someone other than the client under USPAP standards, the appraiser must use the Appraisal Report format. If anyone other than the appraiser’s client will be relying on the report, it cannot be a Restricted Appraisal Report.

How long does an appraisal take?
Time depends on several factors. First, how much equipment is being appraised? A large factory with thousands of pieces of machinery will take far longer than a small restaurant with only a couple of dozen pieces of equipment.

Other factors that can affect how long the appraisal will take are timing requirements — when do you need it, how many levels of value are being requested, and the type of equipment. Is it rare or can comparable items be easily found?

What will a certified appraisal cost?
Every appraisal has different requirements. The simplest answer is the cost will vary with the scope of work.

What can I expect during the process?
Expect the appraiser to view the equipment and document any pertinent information that will help to identify the equipment. The appraiser will ask about the make, model and serial number of the equipment, along with its current condition.

Appraisers will also need to know whether the equipment has been properly maintained, if there are maintenance records and if the equipment has any special features or upgrades. Appraisers may let clients know in advance what they will be looking at and any documentation they will need so that it can be available during the inspection.

Once the appraiser has documented the equipment, the research process begins. The appraiser will establish a value for the machinery/equipment and then write and certify the report.

Is the appraiser required to personally view the equipment?
An appraiser does not need to personally view the equipment. The appraiser can rely on another party (including the client) to provide necessary documentation. This is considered a “desktop appraisal,” and the appraiser is required to disclose this within the report and in the report certification.

What should a business owner look for when choosing an appraiser?
When choosing an appraiser, a company should only use a “qualified appraiser.” This individual, as defined by the IRS, has earned an appraisal designation from a recognized professional organization for competency in valuing property. Also, qualified appraisers regularly prepare appraisals for which they are compensated and demonstrate verifiable education and experience in valuing the type of property being appraised. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

Clearing up misconceptions surrounding the WOTC

The Work Opportunity Tax Credit (WOTC) is a federal program that incentivizes employers to hire people from certain target groups who face barriers to employment.

“The credit is meant to change behavior and encourage companies to take a chance on those who have barriers to entry in the workforce. It’s designed to give these individuals an opportunity at landing a job,” says Terracina Maxwell, COO at Clarus Solutions.

There’s no limit on the number of qualified individuals a company can hire, which makes it a significant option for companies willing to add a screening phase to their hiring process. Still, companies balk, often because they’re concerned about being accused of discrimination, that the administrative requirement is too time-consuming, or because of the uncertainty that the credit will be renewed by Congress.

Smart Business spoke with Maxwell about the state of the credit and why employers should give it a second look.

What is the value of the WOTC to an employer? Is it worth it?

The tax credit, depending on the category of person to whom it applies, can allow a company to claim between $2,400 and $9,600 per person. Companies that do a lot of hiring — especially those that hire hourly workers — would benefit from adding a stage to their hiring process to determine if a candidate qualifies for the credit.

Employers are only given a tax credit, which is based on hours worked, for a qualifying employee in their first year of hire. This is because Congress is incentivizing hiring — staying on the job for more than a year is great, but this credit is an attempt to give people a chance at a job.

Companies of any size or type may participate, and the target groups defined by Congress include those on government assistance programs, veterans, the disabled, felons and the long-term unemployed.

How difficult is it to collect on WOTCs?

Although this is a federal tax credit, it is administered at the state level. And because there is a lot of back-office paperwork that must be completed to file for WOTCs, it’s often an outsourced function. It requires a lot of interaction with the state workforce administrator, and can be cumbersome for small companies or companies that operate in multiple states.

Many think applying for the credit is too much work. That’s justified, as historically all screening had to be done with pen and paper — and it was a lot of paperwork. After 2012, companies were allowed to administer it with electronic signatures and that has significantly decreased the amount of paperwork involved.

While the WOTC has existed since 1996, it would often expire at the end of each year, requiring Congress to re-enact it. This past year, however, Congress renewed it through 2019, allowing companies to confidently set up a process to screen for this credit as a part of their hiring process.

Is there a maximum amount of WOTCs an employer can collect?

There is no maximum WOTC an employer can collect. Congress wants many people in the designated groups to get hired.

It’s a nonrefundable credit, so a company in a net loss position with no tax liability will not be able to use the tax credit in the year it is earned. The credit will, however, carry forward for 20 years until a profitable position is reached.

Should employers be concerned that qualifying questions for WOTCs could be misconstrued as discrimination?

Individuals within the groups targeted for WOTCs can be hired without the risk of the employer facing allegations of discrimination if the employer uses IRS-approved forms or asks only the questions identified therein. Concerned employers can turn to the Department of Labor, which has created guidelines describing what an employer can ask and in what way.

Secondly, by law, applicants must voluntarily supply the required information. Tell candidates that there is no negative consequence for leaving it blank, and if they do answer it won’t affect their pay. Usually only a small percentage of applicants pass on completing the WOTC screening.

Insights Accounting is brought to you by Clarus Partners

A look at what you need to think about when considering an ESOP

The term ESOP is an acronym for an Employee Stock Ownership Plan. Just like any other qualified retirement plan, the sponsoring company makes tax deductible contributions to the ESOP for the benefit of the employees.

Unlike other plans, these contributions are used to acquire stock in the employer company. An ESOP provides an exit strategy for the company’s shareholders.

Smart Business spoke with Walter McGrail, a principal at Cendrowski Corporate Advisors LLC, regarding the benefits of adopting an ESOP in your business.

What are the benefits of adopting an ESOP?
There are several benefits to consider when deciding whether to adopt an ESOP.

Most people think of the tax considerations as the employer receives a deduction for making contributions to an ESOP, just like it would if it made contributions to a 401(k) plan. Employees can continue to make tax-deferred contributions to the ESOP, just like a 401(k). Owners of C corporations can completely avoid income tax on qualified sales of stock to an ESOP.

Sponsoring employer companies are able to shelter earnings from income tax. Aside from tax benefits, the single most influential consideration in deciding whether to adopt an ESOP is that an ESOP stands ready, willing and able to buy shares of your company.

A company doesn’t need to identify potential shareholders or a market through brokers. If a company has an employee workforce in place, it has a potential buyer for its shares.

How does an ESOP work?
An ESOP is established by the employer company.

The company’s shareholders sell their shares to the ESOP. The selling shareholders can provide seller-financing for all or a portion of the purchase price. To the extent that the sponsoring company has access to bank financing, the company can borrow funds to loan funds to the ESOP to either pay down, pay off or, in some cases, completely pay the purchase price.

The ESOP repays the company loan or the seller financing or both with the proceeds from the tax-deductible contributions made by the employer. This is often referred to as the company receiving a tax deduction for the repayment of the loan used to purchase its shares.

The ESOP may own 100 percent of the company or own company shares along with other continuing shareholders. The ESOP is represented by a trustee, who is a fiduciary, acting on behalf of the employees’ interest in the ESOP.

How much does the ESOP pay for the company’s shares?
The purchase price paid for the shares is based on an independent, third-party appraisal. The appraisal is conducted on behalf of the ESOP and based upon such valuation, the ESOP acquires the shares. The appraised value will reflect the market value of the shares sold.

How do I find out more about ESOPs?
An ESOP involves several parties like any other sales transaction. As discussed, the ESOP will need a trustee. The trustee will need legal and financial counsel, including an independent valuation provider. The company and the exiting shareholder require quality legal and financial advice as well.

Leveraged ESOPs require a bank or other lending institution. As with any other qualified plan, the company will need a plan administrator. In the end, the most important person to the company and its shareholders is an experienced ESOP facilitator.

Work with a professional that possesses the expertise to lead a company through the ESOP adoption process, as well as the share sale process. A strong firm can also provide qualified valuation analysts to assist with the valuation process.

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How to keep your business on track with annual financial checkups

The market and the businesses operating in it are in a state of constant flux. Keeping up with these changes requires forecasts and budgets. But these aren’t static documents. When used correctly, financial forecasts offer business owners a chance to gauge company performance and determine what strategic actions are needed to adjust to the way market realities are affecting their profitability.

“It’s a good excuse to re-evaluate the direction of the company within the context of expanding or contracting opportunities,” says Michael Stevenson, CPA, CFE, CFF, ABV, managing partner at Clarus Partners.

Smart Business spoke with Stevenson about the role of annual financial checkups and how to conduct them to stay on top of market realities and company goals.

What should be reviewed during an annual financial checkup?

The critical information to review during an annual financial checkup is all that pertains to where the company is at today and its goals for the future. That information should include financial, operating and revenue numbers for the past 12 to 18 months to start the conversation. From that conversation, future goals and the plan to achieve them can be set.

During the checkup, review the current head count, gross margins and all other balance sheet items. Look at receivables and payables to ensure the time between each is equal — receivables that are 90 days out and payables that are 30 days out can create problematic cash gaps.

As a company looks to grow or contract with the market, it needs to determine the proper head count to meet its goals and stay within budget. If top line isn’t growing, losses must be minimized. Typically that means selling equipment, cutting back on discretionary expenses or downsizing the employee count. Based on the direction a company is headed it must execute adjustments based on the realities of the situation.

Given all the data and possible paths, companies can face analysis paralysis and struggle to make a decision. But it’s important that once issues are identified in a financial checkup, the company acts.

When during the year should an annual financial checkup be conducted?

Whenever there’s a significant change in the business, a financial checkup is recommended. A very large account may come through the door that requires greater resources than are on hand to service the account, otherwise the company risks losing the client. This is a good time to check on what must be done to service the account to maximize its profit potential.

Absent a big event, financial checkups are best done during the fourth quarter. As year-end approaches it’s a natural time to start thinking about the plan for the coming year.

Who should be involved in an annual financial checkup?

The owner and executive team, whoever that encompasses, should be part of the process. What typically comes out of an annual financial checkup is the direction the company will be headed. It’s important that those involved leave the financial checkup on the same page so that a unified message can be communicated down through the ranks.

Why might business owners avoid annual financial checkups?

The most common excuse is not having enough time. Business owners often become consumed with the process of running their business, getting so immersed in managing day-to-day operations that they think they don’t have time to take a breath and find out what their business is doing.

Some business owners don’t want to face reality. They figure whatever problems might arise they’ll fix it by working harder to generate more revenue. Unfortunately, that doesn’t always work.

Businesses and the economy are and will always be changing. Business owners must recognize the importance of taking a break to get the big-picture view of their company. Those who just put their head down and keep plugging away are hurting their ability to manage effectively. Take the time to complete a financial checkup at least annually to take inventory and re-evaluate goals moving forward.

Insights Accounting is brought to you by Clarus Partners

How to ensure you choose the right person to improve your legal case

Expert witnesses are frequently used in the courtroom by attorneys. While many qualified experts exist, the “right” expert can greatly assist counsel and the litigation with his or her testimony. An expert witness can offer testimony about a scientific, technical or professional issue in a court case.

Finding the right expert is often a difficult task, but attorneys generally look for several attributes when selecting expert witnesses.

Smart Business spoke with John T. Alfonsi, managing director, Cendrowski Corporate Advisors LLC, about the qualities attorneys look for in an expert witness.

What are the key attributes an expert witness should possess?
Attorneys generally seek an expert witness who possesses at least four attributes: Relevant professional experience; a history of testimony in which that person has represented both plaintiffs and defendants; active involvement in his or her field of expertise; credentials.

Why are professional experience and testimony history both key qualities?
Opposing counsel may try to discredit an expert witness by demonstrating a lack of relevant business and/or courtroom experience. Though a potential expert may have years of experience, this does not necessarily mean he or she has a high level of expertise in the specific area of the case, or that his or her experience demonstrates the unbiased nature that an expert must possess.

For example, some experts have only provided their services on behalf of either the defendant or plaintiff. Such a track record might be used by opposing counsel to infer a bias on the part of the expert, even if the bias does not exist.

Why is active involvement an essential quality of an expert witness?
Active involvement often manifests itself in an expert’s writing and speech; both are key elements of his or her testimony. Experts who contribute to their field generally pride themselves on having a thorough understanding of the subject matter.

They may be most up to date on recent rulings and opinions regarding relevant analytical techniques, and will generally ensure their testimony complies with these items. Active involvement may also manifest in the expert’s ability to convey findings to non-technicians.

Experts primarily work with individuals who readily understand the technical terms and analytical methods of the field. This peer group may be quite different from a judge or jury pool. Involved experts will recognize this difference and have a profound understanding of their area of expertise so they can better articulate their findings.

Do attorneys generally look for specific credentials in selecting an expert witness?
Attorneys generally engage experts who hold credentials in their field, requiring the expert to pass rigorous tests, participate in continuing education programs and/ or possess significant related experience. Multiple credentials adhering to such criteria might exist in some fields.

For instance, business valuation credentials fitting the previously mentioned criteria include: Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), Certified Business Appraiser (CBA) and Accredited Senior Appraiser (ASA). No one credential is generally better than the other, but credentials generally emphasize the expert’s commitment to his or her profession and understanding of the technical issues.

Is analytical ability the most important attribute of an expert?
It is a key attribute, but sometimes not the most important. Though an expert may have strong analytical abilities, it is important that he or she be able to articulate his or her findings in a clear and concise manner, both on the stand and in written testimony.

To specifically address this issue, some experts purposefully make liberal use of visual tools, including graphs and flowcharts, and include detailed explanations to ensure findings are well articulated and written at a level that non-business professionals can fully comprehend.

These experts might also assume a reader has little understanding of the technical aspects of the case, or of the analytical methods employed. This strategy helps ensure a reader or listener will not be confused by necessary technical jargon or methods that might otherwise be non-intuitive to a layperson. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

Using historical data, benchmarking to develop a financial forecast

A financial forecast is a rolling monthly assessment of a company’s performance compared to its budget goals. By tracking progress monthly against an annual budget, a company can determine what it needs to do to stay on track and meet year-end goals.

“It’s also a decision-making tool management uses to guide a business,” says Michael Stevenson, managing partner at Clarus Partners. “It can help determine if and when equipment, head count, etc., should be added to manage the timing of any such moves, and it helps companies better understand their cash needs.”

Smart Business spoke with Stevenson about creating financial forecasts, what information to include and what not to do.

Who should be involved in the development of a financial forecast?

Whoever is responsible for company finances is essential to the process. And if there isn’t someone, consider bringing in a consultant to help. Either person should know the tax implications of any financial investments and the impact on cash flow. That can be used to temper conversations around investments so that the full financial consequences can be understood before action is taken.

Additionally, the company’s management team should participate because they have knowledge of the strategic plan and the budgeted financial goals for the company over the next few years.

What data should be used to assemble a financial forecast?

It’s typically easier to pull together fixed/variable expense information and then add revenue projections. Use as a base three to four years of historical data to reveal seasonal fluctuations in both revenue and expenses.

As for revenue forecasts, use the company’s current sales forecast — what’s in the pipeline and where the company wants to grow revenue — to make revenue projections. Balance that against economic, public and industry data to determine if the forecast makes sense.

What is the important historical data to gather when forming a financial forecast?

Consider at least three years of historical data from a profit and loss (P&L) perspective. Look at the cost of sales and determine whether gross margin is stable, increasing or declining. What is a target gross margin percentage? If the company is selling work at lower gross margin than targeted, is it worth it? Ask these questions in the context of gross profit percentage; selling, general and administrative expense as a percentage of revenue; and how these expenses grow with revenue.

Tie your P&L projections into a balance sheet forecast and check the cash balance and working capital. In a financial forecast, it’s best to have working capital that covers expenses on P&L for two and a half months in case revenue is lower than expected.

What is the important benchmarking data to include in a financial forecast?

When benchmarking against industry data, do so against companies that are of similar size and in the same geographic region. The important data to consider is revenue growth, gross margin percentage, EBITDA, and benchmarking working capital and receivables in terms of day sales outstanding.

Collecting receivables every 60 days but paying bills every 30 days creates a ‘cash gap’ or a cash flow problem. In a growing company that cash gap between assets and liabilities can get big enough that it must be funded with either a line of credit or a loan.

What are some common financial forecasting mistakes?

It’s a mistake to create hockey stick projections without the related infrastructure increase. For example, a company may be growing at 5 percent annually then decide it wants to grow at 15 percent, but does so without acknowledging the necessary increase in expenses to meet that goal. Infrastructure and personnel must grow to support higher revenue goals or a company won’t have the resources to make the climb.

Many companies also fail to consider the tax impact of an investment. Any time money is made there are tax implications, even in a pass-through organization.

Budgeting and forecasting help companies make good decisions. Sticking to them gives companies a higher survivability rate than those that fly by seat of their pants.

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